For years, the global oil majors have been like Formula One cars, racing flat-out to grow. Investors now want them to take their foot off the pedal.
Pressure has been building on them to curb their vast capital spending programmes and return more cash to shareholders. Those that do have seen their stock price rise.
Experts say the issue of capital discipline has become pivotal to any assessment of the sector. “The critical debate among equity investors is: what is the right balance these companies should be striking between retaining cash to reinvest in the business and distributing it to shareholders?” says Martijn Rats of Morgan Stanley.
For many, the right balance at a time of high industry costs and a stagnating oil price is to stop splurging on expensive projects and splurge instead on higher dividends and share buybacks.
The largest western oil companies, ExxonMobil, Chevron and Royal Dutch Shell, have so far resisted such reasoning. Simon Henry, Shell’s chief financial officer, said on a call to reporters last week that it would be “too easy to get cheap headlines and a cheap boost in the stock price just by cutting investment”. That was, he said, in “nobody’s long-term interest”.
But even the big three are now signalling that they expect their capital expenditure (capex) to level off in the next few years. And they are likely to come under continued pressure to bring it down.
FT
